RT Journal Article
SR Electronic
T1 Avoiding Interest-Based Revenues while Constructing Shariah-Compliant Portfolios: False Negatives and False Positives
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 136
OP 143
DO 10.3905/jpm.2018.44.5.136
VO 44
IS 5
A1 Arslan-Ayaydin, Özgür
A1 Boudt, Kris
A1 Raza, Muhammad Wajid
YR 2018
UL http://jpm.iijournals.com/content/44/5/136.abstract
AB Shariah law prohibits investments in equities of companies for which interest income is a considerable source of revenue. In practice, this is often enforced by prohibiting investments in firms for which the reported interest-based revenues exceed a predetermined percentage of the firm’s total revenue. In this article, the authors investigate an alternative approach that consists of avoiding firms that are expected to have interest-based revenues exceeding the acceptable threshold over the investment horizon. They compare the traditional backward-looking approach with the proposed forward-looking analysis for a sample of S&P 500 firms over the period 1984–2015. Their results show that the forward-looking approach outperforms the backward-looking approach in terms of both fewer false positives (firms classified as compliant when they are not) and false negatives (firms classified as not compliant when they are).